Service organizations are often ideally suited for activity-based costing. In no less than 200 words, explain why the previous statement is true and discuss what some of the special considerations are in the design of cost accounting systems for service organizations

First Post:

• Respond to the question thoroughly. This is a formal assignment with a minimum of 200-250 words.
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Second and Third Posts:

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#1

According to Blocher et al. (2019), activity-based costing is employed to improve the accuracy of cost analysis by more accurately tracking of costs incurred to provide products or render services. This methodology allocates overhead costs by using multiple cost drivers that are considered relevant. Both volume-based and non-volume-based cost drivers are used to more accurately allocate the costs based on resource consumption during various activities.

Due to the nature of services that contains separatable steps, activity-based costing is very helpful because it enables each step of service to be accounted individually with its respect cost driver, which leads to more reasonable and useful cost analysis for the decision making of the management. For instance, the activity-based costing is ideally suited for the repair process of Apple, which is a service process. Whenever a customer would like to repair his or her product, an appointment is required to be scheduled with a customer service specialist. A product specialist needs to examine the product for diagnosis. Then, an actual repair when needed will be performed. If applicable, this repair may be chargeable, which may require a cashier’s involvement. Each of these steps can be accounted for separately with the activity-based costing.

Reference

Blocher, E. J., Stout, D. E., Juras, P. E., & Cokins, G. (2019). Cost management: A strategic emphasis. New York, NY: McGraw-Hill/Irwin.

#2

Activity-based costing is a method in accounting system that assigns overhead and indirect cost to related products and services according to Will Kenton (2019). Blocher et al (2019) also mentioned this activity-based costing as a method that would increase the accuracy on all the cost associated to providing a service or a product. In other words, activity-based costing tracks down all the cost associated during the event of a production or service, and therefore increase the accuracy of the expenses when it comes to analyzing costs. For service organizations, lots of costs are implicit; for example, we often allocate the labor cost for service, but transportation or the wait time is always part of the factor that needs to be considered in. A great example is moving company. The cost of a moving service should include the starting location, the cost of transportation including the fuel cost and mileage cost, the labor cost, the time waiting for client to show up, the cost of packing materials, the cost to deliver to new location, and finally the cost to return to facility. There are more overhead expenses to be allocated, but with activity-based costing, we can now see all the cost rather than just the obvious ones.

Will Kenton, Activity-Based Costing (ABC) (2019), www.investopedia.com/terms/ (Links to an external site.)

Blocher, E. J., Stout, D. E., Juras, P. E., & Cokins, G. (2019). Cost management: A strategic emphasis. New York, NY: McGraw-Hill/Irwin.